By original cost is meant full cost of the asset in position ready for
use. By scrap value is meant the estimated value of the asset at the
time of its discard, when removed from position and ready for sale or
other mode of disposal. This is sometimes called its salvage value as
distinguished from its value while still in position to render service
but awaiting discard or break-up. By estimated service life is meant
the time during which the asset will be used for service. This may be
expressed in ordinary units of calendar time, such as the year; or in
units of service time, such as working hours; or finally in units of
output, such as tons, cubic feet, kilowatt hours, etc.
Symbols to be Used
For purposes of notation and reference the following symbols will be
used:
V = original cost
V₁ = depreciated value at end of first period
V₂ = ” ” ” ” ” second period
Vₙ = ” ” ” ” ” last period, i.e., scrap value
n = length of service life
d = rate of depreciation per period
D = total amount of depreciation, i.e., V - Vₙ
D₁ = amount of depreciation during first period
Dₙ = ” ” ” ” last ”
r = rate of interest
R = 1 + r, i.e., 100% plus the rate
1 - r = 100% minus the rate
A = annual amount to be paid under the compound interest methods
It should be noted that the foregoing factors are all estimates, with
the exception of original cost, and that when making these estimates
the principles of depreciation as discussed in preceding chapters
must be taken into consideration. Thus, a decision must be made as to
whether physical or functional depreciation is the controlling factor
in determining service life. In the determination of service life, the
policy as to repairs, renewals, and maintenance has a very important
bearing. In fixing the scrap value, the relation of inadequacy,
obsolescence, wear and tear, and age to the values remaining in the
asset must be considered.